1.1 Brief of the Case

1.2 Background of the Case

• Under Delhi VAT’s Section 9(2)(g) (analogous to GST’s Section 16(2)(c)), input tax credit (ITC) was denied if the supplier hadn’t “actually deposited” the tax collected.
• Arise India, a bona fide purchaser, availed ITC on supplies for which dealers had issued tax invoices and complied in good faith.
• The department issued show-cause notices demanding reversal of ITC due to supplier defaults.

1.3 Key Legal Provisions Discussed

• Delhi VAT Act S-9(2)(g) & GST Act S-16(2)(c) – credit allowed only if tax “actually paid” by supplier.
• Articles 14 & 19(1)(g), Constitution – right to equality and conduct business.

1.4 Petitioner’s Arguments

• A bona fide purchaser shouldn’t be penalized for supplier’s default.
• The obligation is on the supplier, not purchaser, to deposit tax.
• Denial of credit hurts legitimate business operators and violates constitutional rights.

1.5 Respondent’s Arguments

• Denial clause is valid fiscal measure.
• Legislature intended to prevent misuse of ITC by ensuring payment by suppliers.
• Purchasing dealer must somehow ensure suppliers paid, a legislative policy decision.

1.6 Court’s Findings and Analysis

• The provision fails Article 14 as it doesn’t distinguish between bona fide purchasers and those colluding in fraud.
• It is unreasonable and arbitrary to expect purchasers to verify supplier tax deposits.
• Remedy lies against defaulting suppliers; not with penalizing innocent buyers.
• Referred to precedents like Quest Merchandising v. Delhi, affirming same principle.

1.7 Court’s Judgment & Order

• Held the impugned clause unconstitutional insofar as applied to genuine purchasers.
• Show-cause notices and tax/penalty orders against Arise India were set aside.
• Direction issued that department should act only against defaulting suppliers, unless collusion is proved.
• Supreme Court dismissed Revenue’s Special Leave Petition on January 10, 2018 (“TS-2-SC-2018-VAT”).

1.8 Significance of the Judgment

• Protects innocent purchasers from bearing suppliers’ compliance lapses.
• Constitutional values (Article 14 & 19) are upheld in tax frameworks.
• Influenced GST jurisprudence (Section 16(2)(c)).
• Basis for later High Court protections (e.g., DY Beathel, Calcutta HC).

1.9 Conclusion

The Delhi HC made a landmark reading down of VAT law to uphold fairness, the sanctity of bona fide business, and constitutional equality. This precedent continues to guide GST rulings, affirming that purchasers who transact in good faith cannot be penalized for supplier defaults unless collusion is shown.